Risk-averse, regulation-crazy, deflationary Japan was never an obvious epicenter for Bitcoin trading. And yet the government has openly welcomed the crypto industry, betting that blockchain innovation would catalyze a startup boom and create new wealth and jobs.
So should the Bank of Japan (BOJ) go one step further and issue its own cryptocurrency?
“This will give the BOJ more control of the economy,” says Jake Adelstein, co-author of Pay the Devil in Bitcoin.
Over the last 20 years, the country threw virtually everything imaginable at its deflation problem but with limited impact. The government spent trillions of dollars on infrastructure, cornered the bond and stock markets, and went to war against currency speculators.
Like much of Asia, Japan is short of risk capital to catalyze a startup revolution to generate new jobs, increase wealth and disrupt a rigid economy. But now blockchain entrepreneurs are filling the void.
The idea of issuing digital currency is getting renewed interest thanks to the International Monetary Fund report. In a recent report, the IMF explores why deflationary pressures are coursing around the globe despite the lowest interest-rate environment in history — and possible remedies. Economists Ruchir Agarwal and Signe Krogstrup make a compelling argument: central banks are going cashless.
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Few monetary debates generate greater passion that whether central banks should issue digital currencies. In recent months, IMF head Christine Lagarde has fielded several questions about blockchain applications. Would, say, a digital currency issued by the Bank of Japan increase trust in cryptocurrencies? Or would it spell doom for such a nascent market?
At least one thing is clear: paper money is becoming obsolete. From China to Sweden, consumers are more likely to pay with smartphone apps than notes. ATM machine booths are lonely places as payment systems evolve — from Alipay and WeChat in China and Paytm in India to PayPal and Venmo in the West.
Central banks face their own adapt-or-die dilemma. Since the 2008 global financial crisis, all major monetary authorities cut borrowing costs to zero. And with surprisingly limited impact. Ultra-low rates haven’t ended Europe’s debt perma-crisis. They haven’t stopped U.S. wage inequality from deepening. Nor have they extricated Japan from a 20-year deflationary funk.
The real problem is the lack of traction. The forces of globalization have rendered economies porous. When the Federal Reserve pumps liquidity into the U.S. financial system, sizeable portions leak abroad. That dynamic is placing new — and barely understood — limits on how low central bankers can drive borrowing costs. Economists call it the “zero lower bound” barrier, or ZLB.
This is where the blockchain can help. Back in September 2015, Andy Haldane, chief economist at the Bank of England. asked a straightforward question: instead of quantitative easing and other conventions, why aren’t central banks adopting blockchain technology to increase their firepower?
“One interesting solution,” Haldane argues, “would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form. This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.”
Here, the vagaries of human nature come into play. The fallout from 2008 means many consumers lack confidence to spend, which is robbing central banks of the so-called multiplier effect that makes their policies so potent. A digital currency, Haldane hypothesizes, would make it easier to control withdrawals. Central banks could limit or incentivize spending activity. They could even tax excess savings, prodding consumers to, essentially, spend it or lose it.
A digital currency would empower the BOJ to either encourage consumption or, in extreme cases, increase electronic accounts to boost credit.
“What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential,” Haldane said. “On the face of it, it solves a deep problem in monetary economics: how to establish trust — the essence of money — in a distributed network.”
If real estate is all about location, monetary economics is a matter of timing. And the timing of the IMF’s proposed remedies dovetails with worries about China’s slowdown and the next U.S. recession. Or even another global crisis brought on by excessive debt and leverage.
“If another crisis happens, few countries have that kind of room for monetary policy to respond,” IMF economists Agarwal and Krogstrup wrote.
The answer? A cashless world, where “there would be no lower bound on interest rates,” they argue. “A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.”
Fully phasing out physical cash would take time, of course, and require an ample adjustment period. In the interim, central banks would need to keep a certain amount of cash in circulation, while also driving rates deeply into negative territory.
One idea from the IMF: prod central banks to divide the monetary base into two local currencies. Cash would remain cash, while a digital currency would reflect the policy rate of interest. There would be a conversion rate. When the central bank sets the rate, the value of the physical money would also fall or rise in value.
The idea was enough to create some buzz on Reddit. And yet a dual currency system would only be a first step. The longer-term trajectory for money as we know is unmistakable. All the more reason for Japanese officials to start putting blockchain technology to use.